Help Clients Avoid Social Security Regret

In a perfect world, your clients could expect to ease into their golden years with little to no regret about their finances. Sadly, we don’t live in a perfect world, and sometimes, regret about decisions comes in all shapes and sizes. So what then about a client regretting a so-called Social Security “mistake?” Is this a genuine phenomenon or is it an urban legend? A recent how-to from the Nationwide Retirement Institute outlined four potential strategies advisors can share with clients who’ve filed for Social Security, only to realize they no longer want to collect.

For instance, clients can change their minds within the first 12 months of collecting. They have the option to pay back the money they’ve received. In essence, this wipes the slate clean. Auxiliaries such as a spouse or children could also choose this and receive the same treatment.

Nationwide writes that nearly 75% of beneficiaries will elect Social Security sometime between age 62 and full retirement age. Nationwide posits that eventually, a handful of clients who start Social Security on the early end will come to regret their decision. As such, they will be looking for ways to reverse the decision with minimal damage to their quality of life. In addition to paying back the money, clients have the option to return to work (with stipulations), voluntarily suspend their benefits, or maximize the benefits for a spouse if they have not yet elected the benefit yet, according to Nationwide.

This overall scenario has yet to bear out for many financial advisors, including Livonia, Mich.-based Robert Schmansky, president of the fee-only firm Clear Financial Advisors, a firm with $17 million in assets under management. Like most, Schmansky finds that erring on the side of prevention by developing a plan ahead of time and helping clients understand what their options are greatly helps thwart any potential regret later on.

“[For my] clients, sometimes I bring it up if they’re approaching retirement and looking at where their money will come from and what the options are,” he says in an interview with FA-IQ. “Sometimes they are vaguely aware there may be options to delay and may not know all of the strategies that are involved. It depends on the individual.”

Jared Hoole, president of Lakeside Financial Planning, hasn’t had to correct a client’s “mistake” or “regret” pertaining to Social Security. But he has signed clients who were already collecting based on their own choice or at the recommendation of a former advisor.

“Despite my recommendations (and that of the retirement planning software), they were reluctant to shut off their income stream,” Hoole writes in a note. “For one reason or another, clients seem to have preconceived notions about Social Security and are reluctant to change their mindset, regardless of the hard dollar evidence. In my experience, the only time a client would want to “fix” their Social Security is if they came to that conclusion on their own.” Hoole, who has offices in Windham, N.H. and Burlington, Mass. and whose firm has $11 million under direct management and another $5 million under advisement, adds that the solvency of Social Security has clients a bit skittish at times.

Marthin De Beer is CEO of San Jose, Calif.-based BrightPlan, and Brian King is chief planning officer of St. Louis-based Plancorp. The two firms joined forces recently and became sister companies with the goal of providing solid fiduciary advice to any investor regardless of their price point. In a joint interview with FA-IQ, both said they align with their peers in that education ahead of the event is the best approach.

King says at Plancorp, which has $4 billion in client assets, part of the financial plan includes “doing work on the front end to figure out the right thing and trying to advise or recommend that at least the spouse with the higher earnings record defers their benefit a little bit longer to maximize survivor benefit for whatever spouse survives the other.”

“We don’t come across people who take it early,” he adds. “We’ve been having clients wait until they reach the full retirement age, or delaying.”

On the other hand, De Beer says anyone filing early or at a less desirable time in their age and working life can occur because foresight and knowledge aren’t always available to investors across the board. “It’s hard for some people to understand what the rest of their life will look like,” he says. “Visualizing for them what the differences look like and the implications of taking Social Security early or later goes hand in hand. A lot of good people can easily make the mistake of not understanding the implication when it comes to retirement.” BrightPlan currently has over $100 million in assets under advisement.

Schmansky also says that most clients make claims because they need the money now rather than later anyway. There are a few cases where delaying might be better for the client, but overall, if they need the income, they will elect to take it.

“The psychology of it is ‘We paid into this through our lives to get to retirement and we want to turn it on and collect,'” he says. “There is also fear the government may change the rules in the future or they may not live long enough for the deferral to pay out. We don’t find a lot of people where it’s truly a mistake to turn it on.”